DELL COMPUTERS: USING THE SUPPLY CHAIN TO COMPETE The personal computer (PC) sector is still in its infancy

when, in 1983, medical student Michael Dell began buying up remainder stocks of IBM PCs from local retailers, upgrading them in his college dorm, and then selling them on at bargaining prices to eager consumers. Dell abandoned his studies soon afterwards to concentrate on his growing computer business. By 1985, his company, Dell computers, had switched from upgrading IBMs to building his own machines, but Dell was different from other computer manufacturers of its day. The machines themselves were technologically unremarkable, but it was the way in which they were sold directly to the customer that gave Dell a unique advantage over established, product focused, PC makers. While the industry leaders vied amongst themselves to introduce PCs with ever more impressive technology, little consideration was given to mundane business of supply chain management. The computers they produced were invariably made to forecast and because the way they were sold through shops, resellers, and systems integrators were then destined to languish for an average of two months in warehouses or on shop shelves before being purchased by the customer. Meanwhile Dell remained focused on the end user, thus avoiding the inherent double jeopardy created by the dynamics and economics of the industry. Firstly, around 80 per cent of the costs of manufacturing a PC are component costs, and component costs have been falling since the industrys inception, particularly the all important processors that continue to fall in price by an average of 30 per cent per year. The longer these components wait to be sold, the worse value they become. Secondly, there is the risk, that a step change in technology may make millions of pounds worth of finished PCs obsolete overnight, focusing manufacturers to either compensate resellers for unloading stocks at a loss, or incur the costs of shipping them to developing countries where they can be sold off cheaply. By selling directly to the customer Dell was able to configure and assemble every PC t order, thus avoiding the risks associated with carrying finished inventory, which in turn enabled it to maintain its cost advantage over its conventional rivals. Dells low priced machines with their bespoke configuration became an attractive alternative for those customers who were confident enough to buy direct. For many years, received wisdom in the industry considered Dells position to be nothing more than that of a successful niche player. It was widely believed that the majority of business to business customers and indeed customers buying PCSs for the home, would always prefer to purchase their equipment through traditional channels, where help would be at hand should something go wrong and consumers could see and touch the products before purchase. In order to break out its perceived niche, Dell embarked on a brief flirtation with conventional retail distribution channels. The move was a mistake. Retails sales plummeted as soon as Dell offered a new PC through its direct channels. Dell was obliged to compensate retailers for their losses. As a result the company posted its first ever loss ($36 million) in 1993. The ill judged foray was salutary lesson in the perils of attempting to operate through conflicting distribution channels and a vindication of its original low cost direct sales strategy. Dell pulled out of he retail market in 1994 and retrenched with a vengeance, rebounding immediately with profits of $149 m. From this point on Dell concentrated on finding ways to leverage the strengths of its original direct sales strategy, concentrating on minimizing inventory and increasing return on capital employed. Leanness, flexibility and above all time compression were the keys. Over the next three years Dells operations were closely reexamined to squeeze every possible moment of non value adding time out of its procurement and assembly process By 1997, Dell was not only a model of JIT manufacturing, but had applied its own exacting time standards to the rest of its supply chain. It had specified that the majority of components have to be warehoused within 15 minutes of Dells three factories (in Austin, Texas; Limerick, Ireland; Penang, Malaysia), and many components

are not ordered from a supplier before Dell receives a customer order. To achieve such levels of cooperation and integration Dell has reduced its number of suppliers from 204 companies in 1992 to just 47. At the same time it has preferred to source fro suppliers close to their plants rather than from more distant offshore suppliers, even thought he local manufacturing costs may be higher. For Dells Limerick plant at least, 40 per cent of components are produced and sullied on JIT basis, a further 45 per cent of components are held in supplier hubs, located close to Dells factory. The suppliers restock their own warehouses and mange their own inventories, delivering to the factories on a consignment stock basis. Bulky finished subassemblies, such as monitors and speakers are treated differently. Instead of shipping them to Dells factories, they are sent directly to the customer from the suppliers hub (located close to the market rather than close to Dells factory), saving Dell approximately $30 per item in freight costs. Dell is billed for the components only when hey leave the suppliers warehouse in response to a customer order, so that the components themselves are likely to spend only half a day as Dells own inventory. The suppliers receive payment approximately 45 days later. Where the supplies of essential components (such as disk drives) cannot be assembled as quickly as the computers can be bolted together, Dell impressing the suppliers to shorten their own lead times, but in the meantime, their components must be built to forecast. Fortunately, demand for components is much more predictable than demand for finished goods, through shortages of some critical components (most noticeably microprocessors) continues to be a problem across the industry. Here again, the direct sales method places Dell at an advantage over those makers who use traditional routes to market. Because Dell communicates directly with its customers, it is able to shape demand through its telephone sales by steering customers towards configurations using readily available components. Meanwhile Dell has forged ahead with Internet sales as an even more cost effective version of its direct sales approach. Dell is not the first or the only PC retailer to venture into cyberspace, though by 197 it was certainly the most successful, mainly because no other manufacturer was better placed to make such a move. Within six months of opening for business through its Website, Dell was clocking up Internet sales of $1m per day, with sales through the channel growing by 20 per cent per month. Far from remaining a small niche option, direct buyers now account for a third of all PC sales in the US, up from only 15 per cent in 1991. Internet sales have been slower to take off in Europe and Asia, but they are rising and are set to climb higher in these increasingly computer literate societies. To place an order customers simply dial into the Website and follow the on screen instructions. The software allows them to monitor on screen impact of each option a s they configure their PC, then tap in their credit card or account payment details, before finally placing the order at the click of a mouse. The customer receives confirmation of he order within five minutes of its placement, not more than 36 hours later their bespoke PCs are trundling off the production lines and onto the delivery trucks. Most of this tome is spent not assembling the machines, but testing the machines and loading software. Dell can expect to see payment for most sales within 24 hours of order placement, while rivals such as PC market leader, Compaq, must wait around 35 days for payment through primary dealers. Even though other direct sellers are apt to take over a fortnight to covet an order in cash. By the end of 1997, Dell was growing at a rate that was more than three times the industry average and had become the world s second biggest PC maker (by unit sales). Third quarter revenues were up 58 per cent to $3,188m, and profits for the quarter up 71 per cent on the previous year to $248m. Finished goods inventory and work in progress stood at a combining figure of just $57m, with a further $244m in raw material and other items, giving a total inventory of around 11 days of

sales. Dell s growth and return on investment are the envy of the industry and have been reflected in the staggering rise of Dell s stock price. Other established industry players have tried to emulate Dell s direct sales formula, but have retreated after running into the same channel conflicts as Dell had encountered in 1993 with its foray into retail sales. In the meantime, Dell is moving on to its next big growth opportunity the network serve business where through its partnership with network equipment manufacturer 3Com Corp, it hopes to apply its PC and time saving know-how to reduce the lengthy period needed to test the compatibility of each newly launched computer or networking device. By supplying 3Com with new computers as soon as they are introduced, the partners hope to slash the existing 60 -90 days testing period for new equipment to just two weeks. Acting together to bring new solutions to the market more quickly, the partners were set to outpace their rivals and make a lasting impression on the network server business.